Iran could be allowed to continue with its nuclear programme if it agrees to stop enriching uranium to a critical level from which it could quickly produce a nuclear weapon.

Western powers are ready drop demands for a complete halt to all Iran’s nuclear work, provided the regime pledges to halt uranium enrichment to the crucial 20 per cent threshold, The Daily Telegraph understands.

The proposal would be a key element of a compromise deal, to be discussed by leading world powers in Baghdad on Wednesday, that could also see Iran open up its secret military facilities to United Nations inspectors.

In return, sanctions against Tehran would be eased, with some even suspended should the Islamic regime successfully prove that its intentions are peaceful.

Last night, a deal to resolve the impasse was said to be close. Yukia Amano, the head of the UN nuclear watchdog, the International Atomic Energy Agency (IAEA), said he expected an agreement to be signed “quite soon” that would allow inspectors greater access to the key scientists, documents and suspicious facilities.

Tehran’s nuclear ambitions have been subject to widespread suspicions that it is trying to acquire nuclear weapons, with Israel fearing it would be the target of an Iranian strike. It has threatened a pre-emptive military strike in response.

Baroness Ashton, the EU’s chief foreign affairs representative, will on Wednesday lead representatives from six world powers - the US, Russia, China, the UK, France and Germany - in crucial negotiations that could prove a turning point on the issue.

The so-called “P5+1” grouping are due to meet Iranian representative, Saeed Jalili, in Baghdad.

Diplomats now expect the talks to yield an Iranian offer to suspend part of its nuclear programme in return for negotiations on dismantling the UN sanctions regime that includes the prospect of a US and European-driven oil embargo. This could include an offer to limit uranium enrichment to 3.5 per cent.

The hopes of a breakthrough follow two days of preliminary talks between Mr Amano and Mr Jalili in the Iranian capital.

Speaking as he returned yesterday, Mr Amano said: “The decision was made to conclude and sign the agreement ... At this stage, I can say it will be signed quite soon.

“We understood each other’s position better.”

The Iranian regime quickly made clear however, that any concessions must be immediately reciprocated - probably with an agreement “turn down the volume” on sanctions.

“It is of crucial importance that our cooperation will entail reciprocal steps, that is, our nation’s trust should be built in the trend of talks and cooperation,” Mr Jalili said.

The West’s main concern is Iran’s production of uranium enriched to 20 per cent, which is far higher than needed for regular energy-producing reactors. The US and its allies fear the higher-enriched uranium could be quickly boosted to warhead-grade material.

One Western official told The Daily Telegraph on Tuesday night: “The meaningful issue must be the 20 per cent enriched material - then some sort of pause on sanctions is not a difficult thing.

“The key thing is what is good enough and what prevents a third party strike on Iran.”

As part of any agreement, Mr Amano is focused on getting Iran to let UN experts into high-profile Iranian sites, including the Parchin military complex southeast of Tehran.

Israel however, warned yesterday of the dangers of Iranian tactics.

“Iran wants to destroy Israel and it is developing nuclear weapons to fulfill that goal,” Benjamin Netanyahu, the prime minister, said. “Against this malicious intention, leading world powers need to display determination and not weakness. They should not make any concessions to Iran.”

Hillary Clinton, the Secretary of State, has publicly denied she has eased the US stance in pursuit of President Barack Obama’s policy of talks with Iran.

It was Mrs Clinton’s husband, Bill, as president who first imposed restrictions on Iran over its nuclear programme banning companies from investing in Iranian oil and gas and trading with Iran in 1995.

The net has closed ever tighter with four rounds of UN sanctions between 1996 and 2010 and a raft of bilateral restrictions, including moves by the EU and US to impose a semi-global oil embargo by the end of June. As Opec’s second largest producer, Iran’s oil industry has been pitching into chaos by the embargo.

While fixated on the removal of sanctions, Iranian officials maintain the country has a legal right to nuclear technology. One diplomat close to the talks said that the ultimate success of the diplomacy would hinge on conceding this point to Iran so it can portray the negotiations as a victory at home.

“It’s a myth the West doesn’t accept their nuclear entitlement but it has be framed in a way that allows them to claim victory on this as a sweetener to real concessions,” the diplomat said.